Cyprus “Bail-In”Could Wipe Out Investors

A pending bailout for Cyrus, whose banks were brought to the edge of default when their holdings in Greek bonds were devalued 74 percent by the Greek government last year, could impose big losses on uninsured depositors as well as investors holding Cypriot bank bonds, Eurozone finance ministers have been told.

The Financial Times reported that a confidential memo prepared for their Feb. 18 meeting held the dire news. The proposal for a “bail-in” of investors and depositors, and drastic shrinking of the Cypriot banking sector, is one of three options put forward as alternatives to a full-scale bailout, the memo reportedly said.

The ministers are trying to agree a rescue plan by March, to follow the Presidential elections in Cyprus later this month. The memo warns that, “The risks associated with this option are significant,” including a renewed danger of contagion in eurozone financial markets, and premature collapse in the Cypriot banking sector.

The radical proposal is intended to produce a more sustainable debt solution for the country, cutting the size of Cyprus’s bailout by two-thirds – from 16.7 billion euros ($22.47 billion) to only 5.5 billion euros ($7.4 billion) by making foreign depositors and bond holders take the losses.

It would reduce Cyprus’s outstanding debt to just 77 percent of economic output, compared with 140 per cent in the current full bailout plan. By “bailing in” uninsured bank depositors, it would also involve more foreign investors, especially from Russia, some of whom have used Cyprus as a tax haven in recent years. That would answer criticism from Germany, where politicians are calling for more drastic action to stop the island being used for money laundering and tax evasion, the newspaper reported.

Greek Diaspora bondholders who invested their savings in Greek bonds also took huge losses when Greece devalued them. Prime Minister Antonis Samaras promised to hold them harmless but has ignored them, despite their protests.